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This readable, erudite, myth-busting tome has a somewhat ambiguous title. By calling the banking systems of the U.S. and other nations "fragile by design," Columbia University finance professor Charles Calomiris and Stanford University political-science professor Stephen Haber are not claiming that the designers of these systems intend them to be fragile.

Rather, banks become fragile as an unintended consequence of the designers' aim to have them serve special interests. And as part of what the authors call the "game of bank bargains," the financial consequences of bank fragility are generally absorbed by taxpayers, who are often poorly informed by the media about what is really going on. Government has been known to distort normal market incentives of profit and loss in a whole range of different industries. But since banks, to steal a phrase from the notorious Willie Sutton, are where the money is, it is hardly surprising that politicians have had more involvement in this industry than in any other, as the authors amply demonstrate.

Fragile by Design: The Political Origins of Banking Crises & Scarce Credit

Their approach runs counter to the conventional view that would have us assume that government's role in banking crises is at worst a sin of omission, but never of commission. According to this view, the banks get themselves into trouble through the irrational pursuit of profit, while government stands idly by, because either its leaders are ineffectual or they've been corrupted by the bankers. The possibility that government might have taken a proactive role in causing the problem, in a full-blown version of crony capitalism, is not even considered, but gets strong confirmation in Fragile by Design.

Covering a couple of hundred years of banking history in countries that include Scotland, England, Mexico, Brazil, and Canada, the authors show that the game of bank bargains can breed strange bedfellows. Political scientists who think of special-interest deals as taking place within political parties miss the fact that factions with conflicting ideologies can often form marriages of convenience that transcend party lines. In the case of the U.S., the banks formed an alliance in the 19th century with agrarian populists represented by such disparate national figures as Andrew Jackson, Abraham Lincoln, and William Jennings Bryan. In the 1990s, they were allied with urban populists represented by groups like Acorn and by politicians like Sen. Christopher Dodd and Rep. Barney Frank, who ironically co-sponsored the Dodd-Frank act that was supposed to curb bank abuses.

The myth of laissez-faire in the banking system of 19th century U.S. is decisively refuted by Calomiris and Haber. As the authors explain, U.S. banks were fragile not because government kept hands off, but because an unstable institutional setup that would never have survived in a free market was nonetheless maintained through political means. This was the system of "unit banking"—stand-alone banks that were forbidden by law to branch or merge with banks in other localities in order to diversify risk. The result was that a bank in an area of soybean farmers would be buffeted by the ups and downs of the soybean market, without the potential for its losses to be offset by branches in other areas that might be dependent on textiles, shoes, or steel.

By 1914, of 27,349 banks in the U.S., only 5% had branches, and even those had fewer than five branches on average. When the Federal Reserve was formed in 1913 in order to address recurrent banking crises, the fundamental cause, state-mandated unit banking, was effectively ignored. Nor did any of the political participants seem impressed by the fact that nearby Canada, which permitted branch banking, had not suffered the banking crises that had plagued the U.S. Instead, the Federal Reserve was charged with providing liquidity to unstable unit banks. These banks were further propped up by federal deposit insurance, which Franklin D. Roosevelt had opposed on the grounds that it would only exacerbate bank instability.

As the authors recount, the most recent series of events in the U.S. were filled with tragic irony. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 was the culmination of a process begun in the 1970s that allowed banks to branch within the U.S. and across state lines. As the authors observe, "The United States was now finally in a position to have a banking structure that was not fragile by design."

But instead, the banks got deeply involved in the highly unstable subprime mortgage market, as part of an unlikely alliance with urban activist groups like Acorn, which had the power to block bank mergers by claiming that the banks were not living up to their social responsibilities. As a result, "a system that should have been made more stable by consolidation became spectacularly less so."

The authors' clear and well-documented discussion of what happened should dissuade anyone of the myth that the economic crisis of 2007-09 was caused by the profit-and-loss system of unfettered capitalism.

Stormy Minds

Why madness is rampant

Reviewed by Michael Strong

Is mental illness caused by the freedom bestowed on us by modernity? Liah Greenfeld, a social-science professor at Boston University, argues in this scholarly study that in the modern world, the expectation that each of us be the author of our own destiny has indeed resulted in a historically unprecedented epidemic of mental illness.

Traditional cultures, by contrast, defined our personal roles in life by the family and socioeconomic group into which we were born. In religious cultures, there was a socially sanctioned transcendent realm beyond our ken, and our lives were largely subject to the rules of that realm as defined by its earthly interpreters. But modernity brought a new kind of culture in which individual effort based on one's personal identity became the cultural norm. According to Greenfeld, modern "mental illness" arose for the first time, as well.

The author is careful to differentiate some kinds of madness that have always been with us, such as the dementia of the elderly, from the "big three": major depression, bipolar disorder, and schizophrenia. It is these forms of madness that she regards as the collateral damage of our new-found opportunity to be autonomous beings.

Mind, Modernity, Madness: The Impact of Culture on Human Experience

Greenfeld takes issue with the current view that mental illness will be treatable as soon as we find the biological cause that will then be corrected by the right drugs. While she acknowledges that there are biological and genetic factors that predispose us to madness, she rejects them as causal factors. Medications currently used to "treat" emotional disorders may ameliorate the symptoms, but they do not address the causes, as Sigmund Freud famously insisted.

She then makes a compelling case that how we construct meaning and identity in our lives is a significant causal factor in madness. Insofar as mental diseases like schizophrenia are caused by the struggle with self-definition in open modern societies, drugs will never be a wholly adequate approach.

Three cases of mental illness are analyzed in fascinating detail: James Matthews, subject of the first clinical record of schizophrenic delusion, published in 1810; Nobel Prize-winning mathematician John Nash, subject of the book and film A Beautiful Mind; and Kay Jamison, an eminent psychiatrist and author of the autobiographical memoir An Unquiet Mind. Greenfeld applies her analysis of identify formation to each of their clinical histories, showing how specific life events would naturally result in mental disorders that each of them experienced.

There is no returning to an unfree world, even if that were desirable. But if the thesis of Mind, Modernity, Madness is valid, we ought to focus on the impact of identity-formation on mental illness as much as we focus on pharmaceutical remedies.

MICHAEL STRONG is the lead author of Be the Solution: How Entrepreneurs and Conscious Capitalists Can Solve All the World's Problems.

Flawed Reason

Insight via inconsistency

Reviewed by Jeremy R. Hammond

Israeli journalist Ari Shavit, columnist for the Tel Aviv-based newspaper Haaretz and a contributor to the New Yorker and New York Review of Books, has recently enjoyed an author's version of the best of both worlds—popularity and prestige. My Promised Land, his highly personal account of the "triumph and tragedy" of his country, has not only been a New York Times best seller; it was also named by both the New York Times and the Economist as one of the best books of 2013.

For starters, however, one wonders if the award givers noticed the author's flawed grasp of economics. "The free market," Shavit declares at one point, "enabled Israeli talent and initiative to burst forth and create a booming modern economy." But as a supporter of "social democracy," he also complains that there has been "no government to restrain market forces...and stand for the hardworking, constructive middle class." Shavit therefore seems to believe that Israel's booming, modern, free-market economy can offer few opportunities to the hardworking middle class unless the government acts to restrain the free market. But whether he really holds that bizarre view is thrown into doubt when he elsewhere recalls "the well-to-do houses and upper-middle-class lawns" of the Israel of his youth.

My Promised Land: The Triumph and Tragedy of Israel

Shavit's confused and conflicted view of capitalism might be dismissed as typical of today's man-of-the-left, if it did not typify so much of My Promised Land. Ari Shavit reveals himself to be a fearful person, unsure of who he really is or what he truly believes. The subtitle's reference to "triumph and tragedy" is perhaps an unwitting clue as to why he seems so haunted. For Shavit, the success of Zionism in establishing Israel was a triumph, while Israel's occupation and settlement construction in Palestinian territory is a tragedy, but only because it threatens the gains made by those early Zionists.

Yet, he candidly explains how the Zionist project of establishing a demographically "Jewish state" required the removal of the Arab population. About three-quarters of a million Palestinians fled or were expelled from their homes from 1947 to 1949. In the wake of the Holocaust, this was a necessary step, he says, to create a home for the Jews that would ensure their salvation. It was irrefutable "Zionist justice" in his view, despite the admitted "injustice caused to native Arabs by the Zionist project." Never mind that these native Arabs bore no responsibility for the Holocaust, or that the territory in which this "Jewish state" was unilaterally declared by the Zionist leadership to exist was inhabited by an Arab majority that owned most of the land, while the Jewish community owned less than 7%.

The author expresses his opposition to Israel's occupation and settlement of the West Bank, but nevertheless chooses to adopt the settler community's description of the territory as "Judea" and "Samaria," part of "greater Israel." The problem for him is not the fact that the settlements are built in violation of international law or how this policy violates the rights of the Palestinians, but how it threatens Israel's existence as a "Jewish-democratic state." He describes the growth of the Palestinian population as a time bomb endangering Israel's identity as such. He acclaims Israel's "democratic values" and "moral society" while acknowledging how the fifth of Israel's population that is Arab "have been oppressed" and their rights "trampled" by a state that doesn't treat them as equals to Jewish citizens.

When it comes to enlightenment about Israel's inner and outer conflicts, this book is instructive not despite but because of its prejudice and inconsistency. In this sense, at least, My Promised Land delivers to readers what it promises.

JEREMY R. HAMMOND is the author of The Rejection of Palestinian Self-Determination: The Struggle for Palestine and the Roots of the Israeli-Arab Conflict.